CHAPTER III 
THE THEORY OF EXCHANGE AND ITS COROLLARIES 
§ 1. The theory of exchange and the idea of depreciation. 
THE theory of exchange has long seemed—and still 
seems to many people—to be a mere application of the 
Quantity Theory. For exchange phenomena hardly 
engage the attention of economists, and above all of the 
public, except when the exchange is abnormal, 7.e., when 
the rate is subject to violent fluctuations and falls consider- 
ably below par, or official parity.! Thus, for instance, the 
French exchange aroused very little attention before 1914 ; 
it arouses attention, and serious attention, at the present 
time; for the dollar, which is equivalent at metallic par 
to 5-18, has been quoted at 10, 12, 15, 20 and 25 francs, 
and more, the value of the franc in relation to the dollar 
having dropped progressively in the course of its 
fluctuations. 
1 The expression “par” applies to the normal exchange ratio between 
two currencies of the same metal. This exchange ratio is in no way arbitrary 
once given the definition of both monetary units: for it is exactly equal to 
the ratio between the content of each monetary unit in fine metal. Thus 
the statement that the par of exchange between the franc and sterling is 
25221 francs is equivalent to stating that under the monetary legislation 
fixing the content of the pound sterling and of the franc in fine gold, there 
is as much fine gold in one pound sterling as there is in 25221 francs. 
Parity, on the other hand, is an exchange ratio between two currencies, 
which differ in kind, e.g., between the pound sterling or gold sovereign and 
the silver rupee, or between the United States dollar, which is at present 
gold or convertible into gold, and the French franc which is at present a 
paper franc. Parity is arbitrary, but may be fixed by law or international 
agreement and may, in fact, remain constant, if the convertibility of one 
currency into another continues to be secured. On the other hand, for a 
country which no longer possesses a sufficient stock of metal to make its 
foreign payments on a par basis, by resorting of necessity to shipments of 
bullion, par is nothing but past history and the conversion of its silver or 
paper currency into gold is no less arbitrary, if effected at a parity corre- 
sponding to the former par, than if it is effected at a new parity. 
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